Only in this time of turmoil could a bank report an 18.5 percent decline in earnings per share and call it a proud moment. But that's how U.S. Bancorp officials, announcing securities losses, loan charge-offs and a rise in loan loss reserves, characterized another slide in earnings on Tuesday.
They got no argument from bank analysts expecting far steeper drops in earnings from other banks reporting results this month.
The Minneapolis-based bank's earnings report comes in a period of tumult in the U.S. financial system. In the past week alone, federal officials took control of California-based IndyMac, in one of the largest bank failures ever, and unveiled plans for a taxpayer-backed bailout of two key players in the mortgage market, Fannie Mae and Freddie Mac.
Against that background, U.S. Bancorp reported second-quarter earnings of 53 cents per share, down from 65 cents a share a year earlier. Earnings were 7 cents a share below the consensus of analysts who follow the company.
While net interest income was up 15.6 percent in the three-month period compared with a year earlier and fee revenue also climbed, they were offset by increased loan loss reserves and net charge-offs of $396 million. Total nonperforming assets at the end of the second quarter came to nearly $1.14 billion -- a 34 percent gain from the end of the first quarter.
"I am very proud of the exceptional efforts of the U.S. Bank team and, notwithstanding the need to very carefully manage risk during this challenging economic environment, our company remains focused on business growth initiatives, deepening our current customer relationships and acquiring new customers," U.S. Bancorp Chief Executive Richard Davis said in a prepared statement.
"I'm discouraged that we come down with the contagion in this industry," he said in a conference call with bank analysts on Tuesday. "It's frustrating, but I understand it."
Still, he said, "I'm very, very confident about coming out the other side of this as a stronger company."
Dividend to be protected
Davis said he expected to see net charge-offs increase in the third quarter, but he said the payout to shareholders will be secure.
"U.S. Bank is going to protect the dividend," he said. "We realize how important that is." The bank's $1.70 dividend currently is delivering a 6.6 percent yield for investors who hold the shares.
Said Andrew Cecere, the bank's chief financial officer: "The fact that we're still earning $950 million in that period is, I think, the point we're trying to make. In this environment, these are going to be good results."
Analyst Jon Arfstrom agreed.
"When you look at U.S. Bank numbers, compared to the other regional banks, they're at the top of the list. They're far better than their peers," said Arfstrom, bank analyst at the Minneapolis office of RBC Capital Markets.
Arfstrom expects the average bank, among the 17 he covers, to report a 33 percent plunge in earnings this quarter.
U.S. Bancorp's results were dragged down chiefly by one line on the balance sheet: a $200 million increase in loan-loss reserves in the face of increased home loan defaults and a deteriorating economic environment for builders and other businesses, Arfstrom said.
He remains high on the bank's prospects.
"They have the capital. They have the earnings," Arfstrom said. "They're just trying to stay ahead of more challenging credit conditions."
Matthew O'Connor, bank analyst at the New York office of UBS Investment Research, also was upbeat about the report.
"Overall, it was a decent quarter," he wrote in a note to investors. But the bank's performance compared with troubled rivals makes O'Connor skeptical of much near-term gain for the company's stock.
"The stock may remain under pressure as it continues to trade at a large premium" compared with the company's tangible book value, O'Connor said.
Bank analyst R. Scott Siefers sensed trouble when U.S. Bancorp's results were released in the morning.
"Unfortunately, the stock's lofty valuation leaves very little room for error," wrote Siefers, at Sandler O'Neill in New York. "We suspect the stock will come under pressure this morning as investors digest the lower-than-expected [second-quarter] results, potential for downward estimate revisions in coming quarters, and ongoing credit uncertainty."
U.S. Bancorp shares closed at $22.70, down 63 cents, on Tuesday.
Mike Meyers • 612-673-1746
2nd quarter FY2008, 6/30
2008 2007 % chg. Inter. inc. $3,015.0 $3,236.0 -6.8 Nonint. inc. 1,892.0 1,855.0 +2.0 Income 950.0 1,156.0 -17.8 Net/cm 928.0 1,141.0 -18.7 Earn/share 0.53 0.65 -18.5 6 months
Inter. inc. $6,220.0 $6,423.0 -3.2 Nonint. inc. 3,936.0 3,608.0 +9.1 Income 2,040.0 2,286.0 -10.8 Net/cm 2,006.0 2,256.0 -11.1 Earn/share 1.14 1.27 -10.2 Figures in millions except for earnings per share.
